Leaders ponder funding of £172bn bailout for banks

German Chancellor Angela Merkel and French President Nicolas Sarkozy will hold discussions over how to deal with the problems of sovereign debt exposure in European banks, brought sharply into focus last week with the collapse of Franco-Belgium lender Dexia.

After its collapse, a new set of bank stress tests are expected to be conducted by the European Banking Authority, a move that analysts say will heap added pressure on stretched balance sheets.

It was reported yesterday that some of Germany’s banks are already preparing to raise billions in new funds from private sources – an option said to be favoured by Chancellor Merkel.

President Sarkozy is said to want French banks to have access to the 440bn euro (£380bn) European Financial Stability Fund, originally set up to finance the rescues of Greece, Portugal and Ireland.

On Thursday, the European Central Bank (ECB) offered new emergency loans to banks to help to steady a eurozone financial system shaken by the deepening debt crisis, and Bank of England governor Sir Mervyn King warned the UK was facing its “most serious financial crisis” ever.

A Treasury spokesman stressed today that instability in the eurozone showed how important it was the Government continued its deficit reduction programme.

It followed calls for a halt to spending cuts to stimulate economic growth and tackle rising unemployment, as it emerged public sector job losses in the UK have been far greater than expected.

“The Government has always said that recovering from a financial crisis with such a large debt overhang would be slow and choppy, but as the instability in the eurozone shows, it is vital that the Government sticks to its deficit reduction plan. This plan is supported by the IMF, OECD and CBI and is essential for sustainable growth, It has helped deliver record low interest rates for families, along with 500,000 private sector jobs created last year.”

The Chartered Institute of Personnel and Development (CIPD) said public sector job losses in the first quarter of the financial year were five times greater than projected by the Office for Budget Responsibility for the entire year. It warned more than 600,000 public sector jobs could be lost between 2010/11 and 2015/16, a third more than Ministers say they expect.

The public sector shed almost 250,000 jobs in the Government’s first year in office, said the CIPD, which called on the Chancellor to announce a temporary halt to spending cuts in his autumn statement.

Dr John Philpott, chief economic adviser at the CIPD, said: “Public sector job cuts in this context are a false economy, adding to unemployment and in turn hindering rather than helping the task of fiscal deficit reduction. A more sensible course would be to delay public sector job cuts to the end of this Parliament and if necessary into the next, thereby enabling them to be absorbed more easily without nasty macroeconomic side-effects.

“The Government’s plan for growth must rightly contain measures to stimulate private sector job creation, but the Chancellor should also avoid the own goal of cutting public sector jobs at a time of high and rising unemployment.”

The TUC has published evidence that the brunt of the job losses since 2008 have been suffered by the lowest paid workers. Sales, service and administrative jobs are responsible for 41 per cent of the claimant count rise over the past three years, it said.